Lawsuits

California Court of Appeal Rules RULLCA Does Not Apply to LLC Lawsuit Filed before 1/1/14

The California Court of Appeal held in Kennedy v Kennedy, 235 CA4th 1474 (2015), that the California Revised Uniform Limited Liability Company Act (RULLCA) did not apply to a dispute among members of a California limited liability company because their lawsuit was filed before January 1, 2014, the RULLCA effective date.  The court based its ruling on California Corporations Code Section 17713.03 which states,

This title does not affect an action commenced, proceeding brought, or right accrued or accruing before this title takes effect.

The defendants argued that RULLCA applied because they wanted to be able to use the mandatory disgruntled member buy-out scheme set forth in Corporations Code Section 17707.03(c)(1) which states:

In any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interests owned by the members so initiating the proceeding, the “moving parties,” at their fair market value.

Subsections (c)(2) – (6) set forth a procedure for consummating the buy out.  Subsection (c)(6) states,

A dismissal of any suit for judicial dissolution by a manager, member, or members shall not affect the other members’ rights to avoid dissolution pursuant to this section.

The defendants wanted RULLCA to apply so they could carry out a buy out under Section 17707.03(c) despite the fact the plaintiff had dismissed the claim for judicial dissolution.  There is no mandatory buy out under California’s LLC law before January 1, 2014.

By | 2016-12-13T21:20:06+00:00 July 3rd, 2015|Categories: CA Law, CA LLC Statutes, Lawsuits, Member Disputes|0 Comments

California LLC Member’s Liability for Capital Contribution

Question:  A California LLC owes me money, but claims it is broke.  One of the members of the California LLC signed an Operating Agreement in which he promised to contribute $50,000 to the LLC.  The member never paid the money to the LLC.  Can I collect my debt from the member, but you may have to sue the member and the LLC in the same lawsuit?

Answer:  Yes.  California law provides that a member who makes a promise in writing to make a capital contribution is liable to a creditor of the LLC if the member fails to contribute the money to the LLC.  California Corporations Code Section 17704.03(c) states:

“A creditor of a limited liability company that extends credit or otherwise acts in reliance on an obligation described in subdivision (a) may enforce the obligation.”

By | 2015-05-02T11:18:33+00:00 March 25th, 2015|Categories: FAQs, Lawsuits, Operating Agreements|0 Comments

Missouri Court Holds Minority Member can Pierce LLC’s Veil

Recently, in Hibbs v. Berger, the Missouri Court of Appeals ruled that a 5% minority member can pierce the veil of the LLC.  This case shows how extensive the court’s power is in determining these types of cases.  All LLCs should be knowledgeable about veil piercing, and also what can be one to prevent it.

In Hibbs v. Berger, the plaintiff (Hibbs) was an ex-employee of Tavern Creek, an LLC.  The plaintiff had no voting or management rights in this LLC, which were split on a 50-50 basis between Tavern Creek and Wood Nuts, another LLC.  Tavern Creek and Wood Nuts appointed Taylor and Berger, respectively, as co-managers of Tavern Creek.  Though Hibbs had no voting rights or management rights, he did acquire 5% of economic interests when his employment agreement was revised (once Wood Nuts became 50% owner).

Soon after the new employment agreement in 2007, Tavern Creek experienced financial troubles.  Wood Nuts would assist Tavern Creek during these times by loaning Tavern Creek money.  Despite this, Tavern Creek was unable to recover, and defaulted on these loans.  Wood Nuts exercised its rights under the agreement of these loans, and  obtained all collateral as satisfaction in 2009.  During this time, Hibbs was working for Tavern Nuts.  He was not fully paid for his commission earned in 2007, and never paid for the commission in 2008.  In late August of 2008, Hibbs was terminated and then re-hired as an employee-at-will.  Hibbs then left Tavern Creek two months later.

In January 2010, Hibbs filed a claim against Berger and Taylor, in an attempt to pierce the corporate veil.  The defendants motioned for summary judgment, which was granted, but Hibbs appealed.  The Missouri Court of Appeals began by acknowledging that members of an LLC usually are not responsible for debts of the LLC.  Then, however, the court acknowledged a three-prong test that determines if the court will piece the business entity’s veil.  The parts of this test include:

“(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”

After establishing the rule for veil piercing, the Missouri Court of Appeals specifically discussed if an LLC’s minority member can pierce the entity’s veil.  The court mentioned that this was a case of first impression, meaning that the Court of Appeals has not dealt with this type of case.  Because of this, the court looked to a case in which the District of Columbia Court of Appeals held that a minority shareholder is not prohibited from piercing the veil of the business entity.  The Missouri Court also stated that precluding a minority member from piercing the corporate veil would be unfair to those members.  For these reasons, the Missouri Court of Appeals held that the minority member of an LLC can pierce the entity’s veil, if the plaintiff meets the requirements set by the three-prong test.

Although it was eventually determined that this plaintiff did not meet the requirements to overcome summary judgment, the case provides an important lesson.  LLCs and other business entities should not assume that a member is unable to pierce their entity’s veil.  These managers must know the veil-piercing standard of their formation state, and take steps to ensure that a disgruntled member cannot hold the majority member(s) personally liable.

 

 

By | 2016-12-13T21:20:14+00:00 February 25th, 2015|Categories: Lawsuits, Members, Operating LLCs, Veil Piercing|0 Comments

LLC Lawsuits- Direct or Derivative

Prior to the creation of the first limited liability company (LLC), shareholders were able to sue the corporation through a direct or derivative lawsuit.  Classifying the claim as direct or derivative would determine the procedure of the complaint, in addition to determining the remedy and likely outcome.  Now, with the popularity of the LLC, the derivative and direct classifications are applying to members’ complaints about the operation of the LLC.  Since LLC law does not have too many of these cases, it is beneficial to look at the corporate law (especially because LLC law often borrows from corporate law).  In fact, as seen in several states, it is often corporate case law which determines the outcome of LLC disputes between a member and the LLC itself.  For these reasons, a brief description of the differences between a direct and derivative lawsuit would be beneficial not only to a shareholder, but also to a member or manager of an LLC.

Direct

A direct claim allows the member or members to pursue the lawsuit in their own name(s).  This is allowed only if the member or group of members were injured by the actions of the LLC, and it is those members (not the LLC) who would receive the benefit of recovery.  However, if the entire LLC was injured by the action of a manager, the claim does not classify as direct.  An example of a direct claim would be if the voting rights or interests of a certain member were lost.  Here, it is not the entire LLC that is harmed, but only that member.

Furthermore, for a direct claim, the remedy sought is usually equitable, or non-monetary.  In the example above, the proper remedy would not be money damages, but an injunction to prevent the LLC from harming the voting interest of the particular member.  Overall, if a member is injured (not the LLC), and the remedy is equitable, then the claim is direct.

Derivative

A derivative claim is much more complicated than a direct claim.  A derivative lawsuit is one in which the entire LLC is harmed (by the LLC), rather than a specific member bring injured.  In other words, the lawsuit is brought by a member on behalf of the entire LLC, against the LLC itself.  An example of a derivative law suit would be if the LLC engaged in an agreement to pay an extraordinary amount of money to an individual who is not performing.  Here, a law suit would benefit the entire LLC, and the remedy would be the money lost on the violated agreement.

A key difference between a derivative and direct lawsuit is that the concept of “demand.”  Under a derivative lawsuit, the plaintiff is required to either make demand of the company, or prove that demand of the company is futile.  Demand refers to demanding the LLC take on the case.  Since the lawsuit is meant to benefit the entire LLC, courts have mentioned that the LLC should have the ability to investigate and determine the validity of the case itself.  However, it is apparent that if an LLC hears about the complaint and chooses to investigate, a conflict of interest could result in the LLC dismissing a valid claim, rather than bringing the suit.  Furthermore, since courts often defer to the business judgment of business entities like the LLC, there is a low likelihood that a plaintiff will be able to show that the LLC wrongfully dismissed the suit.

For all of the problems associated with making demand of the company, the plaintiff in this type of suit usually chooses to show demand futility.  To show demand futility, the plaintiff usually has to show that there is reasonable doubt that the managers and directors are independent, or that there is doubt that the agreement/transaction was a valid business decision.  In California, however, there is not a specific test to show demand futility.  If demand futility is shown, then the suit proceeds.  If not, then the suit is dismissed because demand should have been made.

The next step in a derivative lawsuit is based on whether the LLC has hired a special litigation committee (SLC).  An SLC is a committee often employed by the LLC to settle these types of disputes.  A court will defer to the decision of the SLC, as long as the SLC is independent.  To test this, courts analyze how the SLC came to it’s conclusion, evaluating whether the SLC used good faith in it’s reasonable investigation.  If the SLC was not independent, the court could apply it’s own business judgment to determine the value of the suit.  After this, the derivative suit has taken all possible steps, and the suit either proceeds, settles, or has been dismissed along the way.

As one can easily imagine, the direct law suit is much easier for a plaintiff to bring than the derivative suit.  On the other hand, the LLC would prefer a suit to be classified as derivative, because of the multiple opportunities to dismiss the suit, through the demand doctrine or an SLC.  Therefore, if an issue arises in your LLC, be sure to investigate the complaint to determine what steps can and should be taken to protect yourself and the LLC.

 

 

By | 2016-12-13T21:20:14+00:00 February 25th, 2015|Categories: Lawsuits, Member Disputes, Miscellaneous|0 Comments

Creditor of California LLC Wins Judgment Against LLC Members

Question:  If a California LLC distributes all of its assets to its members and dissolves without paying a creditor, can the creditor collect the unpaid debt from the former members?

Answer:  Yes, but only to the extent of the value the member received.  The California Court of Appeals case of CB Richard Ellis, Inc. v. Terra Nostra Consultants, 178 Cal.Rptr.3d 640 (Cal. Ct. App. Oct. 7, 2014) confirmed this concept.

Jefferson 38, LLC, a California limited liability company, signed a listing agreement in 2004 with real estate broker CB Richard Ellis, Inc. (“CBRE”) to sell its land.  The LLC sold it land for $11,800,000, but CBRE was not paid anything.  In 2006 CBRE exercised a clause in the listing agreement to arbitrate the dispute over the commission.  CBRE won an arbitration award of $960,649.30.  The arbitration award was confirmed and judgment entered in the amount of $985,439.80 by the Los Angeles Superior Court.  The judgment was affirmed on appeal.

When the real estate was sold in 2005, the net proceeds of the sale were distributed to the members of the LLC shortly thereafter and the LLC ceased to engage in business.  On February 27, 2006, Jefferson 38, LLC, filed a certificate of cancellation with the California Secretary of State indicating that all of its members voted for the dissolution.

At this point in time the members of the LLC had caused the LLC to distribute all of the LLC’s assets to its members and legally dissolved the LLC while an outstanding claim was pending.  This is a scenario California LLC law attempts to prevent and that is disfavored by the courts.

Because the events that gave rise to this case occurred before January 1, 2014, the effective date of the California Revised Uniform LLC Act, the California Court of Appeals applied prior California LLC law to the case.    Former Section 17355(a)(1) provided:

“Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:

(A) Against the dissolved limited liability company, to the extent of its undistributed assets. . . .

(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.”

The defendants argued that they should not be liable for the debt owed by the LLC to CBRE because they were paid long before the actual dissolution of the LLC.  The Court of Appeals rejected this argument because if that were the law LLC members could easily distribute assets to members rather than creditors and avoid personal liability simply by making the distributions long before the technical dissolution of the LLC.

Current California LLC law with respect to California LLCs making distributions to members is stated in Cal. Corp. Code § 17704.05, which states:

(a) A limited liability company shall not make a distribution if after the distribution either of the following applies:

(1) The limited liability company would not be able to pay its debts as they become due in the ordinary course of the limited liability company’s activities.

(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited liability company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.

Warning to Members of California LLCs:  Do not clean out your LLC’s assets and leave any unpaid creditors.  The general rule of prior and current LLC law that members of a California LLC are not liable for the debts, obligations, or other liabilities of the limited liability company does not apply when the members are paid before the LLC’s creditors.

By | 2016-12-13T21:20:14+00:00 October 26th, 2014|Categories: Asset Protection, CA Law, CA LLC Statutes, FAQs, Lawsuits|0 Comments

Administrative Dissolution for Failing to File a Statement of Information

Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC.  In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information.  When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.

There are many instances when an LLC is administratively dissolved, yet it continues to operate.  This often occurs when the LLC is not aware of the administrative dissolution.  An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform.  This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement.  When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member.  The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State.  Still, the issue remained whether or not the single member was personally liable.

The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease.  By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution,  the LLC was essentially never dissolved in the first place.  The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities.  This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated.  Also, the court highlighted the purpose of the LLC Act: to limit personal liability.  A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.

The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability.  The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved.  By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.

 

 

 

By | 2016-12-13T21:20:14+00:00 September 25th, 2014|Categories: Lawsuits, LLCs & Corporations, Miscellaneous, Operating LLCs|0 Comments

When LLC Member May Be Held Personally Liable For Signing Loan Agreement

Take care when you sign a contract on behalf of your LLC that you do not sign in a way that makes you liable as a party to the contract.  California LLC law contains the general rule that a California LLC that signs a contract is liable for the obligations created under the contract, not its members.  There is a big exception to the general rule.  If you will be signing contracts for a California LLC ignorance of how to sign the contract could cost you big bucks.

The Maryland case of Ubom v. Suntrust Bank, involved a a lawyer who obtained a line of credit for his LLC.  The member of the LLC signed a loan agreement that included language about a personal guaranty.  The member put his personal information such as his social security number and personal address in the guaranty section of the contract, but he did not put anything in the space that asked for the “Legal Name of the Guarantor.”

The loan agreement had a signature line for the “applicant” and a second signature line for the “guarantor.”  Mr. Ubom signed one each lien and wrote “Managing Attorney” after his signature.  The LLC defaulted on the loan and the lender sued the LLC and Mr. Ubom.

The lender claimed that Mr. Ubom was personally liable as a guarantor because language in the loan agreement stated that he guaranteed the loan.  The loan agreement said:

To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).

The court said that based on the language quoted above Ubom agreed to guaranty the debt.  The court said it did not matter that Ubom did not put his name in the on the “Legal Name of the Guarantor” line.

Before you sign a contract on behalf of your LLC you must carefully read the contract and make sure it does not contain any language that would obligate you as the signer.  If you are not sure that signing a contract for your LLC will not cause you to incur liability ask your attorney to review the contract.

By | 2016-12-13T21:20:14+00:00 July 29th, 2014|Categories: Asset Protection, Lawsuits, Operating LLCs, Why People Need an LLC|0 Comments

Florida Determines Charging Order is Exclusive Remedy

Florida’s Fourth District Court of Appeals recently published an important LLC opinion in Young v. Levy.  The issue in this case was whether a writ of garnishment could be used against distributions by the limited liability company.  Specifically, this case interpreted “exclusive remedy” within the charging order provisions to decide the outcome.  This opinion is not only relevant to Florida LLC members and managers, but also to the LLC members and managers in 15 states that have similar charging order “exclusive remedy” language in their state’s LLC statutes.  FYI:  California LLC law is not one of the states that has the charging as the exclusive remedy for a creditor who gets a judgment against a member of a California LLC.  It is undetermined if other states will follow in Florida’s footsteps, but an understanding of the Young v. Levy decision would benefit LLCs who are looking to determine what remedies are available in a cases similar to Young v. Levy.

In this case, Levy owned 51% of the LLC, while Young owned the other 49%.  Due to business-management differences, Levy removed Young from the business.  This led Young to sue Levy for injunctive relief and damages.  Initially, the trial court granted Young’s requests.  However, Levy soon after filed a motion to dissolve the injunction, which was granted.  Then Levy moved for damages regarding attorneys’ fees.  These fees were awarded to Levy, totaling $41,409.45.

To obtain this money, Levy looked to use a writ of garnishment on distributions by the LLC.  The garnishee (LLC) owed over $44,000 to Young.  Young claimed that he was exempt from the garnishment, while Levy filed objections, stating that the garnishment was proper.  This was the key issue analyzed by Florida’s Fourth District Court of Appeals.

Young asserted that the language in Section 608.433 (5) in Florida Statues (2011) did not allow garnishments as a proper remedy.  This section states:

“Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.”

Levy argued that the distributions owed to Young were “profits” or “dividends”; and thus, a writ of garnishment would be an acceptable remedy.  The Fourth District Court of Appeals did not accept this argument, because the term “interest” is defined as share of profits and the right to receive distributions.  This led the court to hold that a garnishment of distributions is not a proper remedy to satisfy judgment.  The court reiterated the importance of the plain language of Florida Statues which emphasized that “

[A] charging order is the sole and exclusive remedy by which a judgment creditor of a member . . . may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions.”

The interpretation of “exclusive remedy” only allows plaintiffs to obtain charging orders on the members’ distributions by the LLC.  Plaintiffs cannot obtain a garnishment on these distributions.  As stated earlier, a similar “exclusive remedy” provision exists in 15 states, besides Florida.  If these other states rule similarly, it will be more difficult for the LLC to collect judgment from a member.

By | 2016-12-13T21:20:14+00:00 June 28th, 2014|Categories: Charging Orders, Lawsuits|0 Comments

Single Member’s Death Could Cause Dissolution of LLC

Some states require that a limited liability company (LLC) have at least two members.  Many states, including California, allow for single member LLCs.  Another jurisdiction that permits a single member LLC is Alabama.  The LLC law of California and Alabama provide that when the single member dies, the LLC must be dissolved, subject to two exceptions.  First, the single member LLC can continue if the operating agreement provides for the continuation and a method for determining the successor(s) to the deceased member.  Second, the LLC can continue if the assignee(s) of the interest of the deceased members elect to continue the business within 90 days of the death.  Recently, in L.B. Whitfield III, Family LLC v. Whitfield, the Supreme Court of Alabama dealt with the dissolution of the single member LLC.

In this case, the single member of an Alabama LLC died, and left his interest in the LLC to his four children.  There was no vote to continue the LLC, and no special provisions in the operating agreement.  Still, the children operated the business for 10 years after their father’s death.  The four children began to have business disputes and one child (the manager) filed a lawsuit against the other three children.  The three defendants discovered the Alabama law that dissolves a single member LLC unless the majority of the heirs agree to continue the business within 90 days.  The three children then sued for a court order that the LLC distribute its assets to the members because the LLC was statutorily dissolved 90 days after the father’s death.

Despite the defenses offered by the plaintiff, the court held that the three children were correct, and that the LLC was dissolved when the children failed to continue the business within 90 days after the father’s death.  The Supreme Court of Alabama said it did not matter that the LLC continued to operate for 10 years.  The court highlighted that the fundamental principles of an LLC include membership admission through a written agreement that is signed.  Since this new agreement was never established, the LLC was dissolved.

Caution:  If a California resident dies his or her membership interest may be subject to an expensive and time-consuming California probate.  To learn about nasty California probates and how to avoid a California probate and save your loved ones mega-bucks read “Trusts Should Own Valuable LLCs to Avoid Probate.”

For more on this topic see “What Happens If the Sole Member of a CA LLC Dies?

By | 2016-12-13T21:20:15+00:00 June 22nd, 2014|Categories: CA Law, Lawsuits, Member Disputes|0 Comments

Arkansas Rules that Member v Member Claims Are Direct

When one member of a limited liability company has a claim against another member or a manager of the limited liability company (LLC), it can be classified as direct or derivative.  A direct claim is one where the individual member is negatively affected by an action of the LLC, but the whole LLC is not injured.  A derivative suit is one in which the entire LLC is affected by a decision of one of it’s managers or members.  In these derivative cases, a member usually brings suit on behalf of the LLC.  Determining the classification is important, because it reveals how the procedure of the claim will be handled

For the LLC, a derivative suit is preferable because there are many opportunities in the procedure which allow for the claim to be dismissed.  However, the plaintiff (LLC member) would rather the claim be direct, so they can avoid procedural obstacles and take have their claim proceed much easier.  For more detail, including implications of both cases, see direct and derivative suits.

Though the differences between direct and derivative claims may be clear, which category the claim falls under might be difficult to discern.  This is especially true for LLCs, because they do not have a long history of these types of cases.  The Arkansas Supreme Court dealt with this issue in Muccio v. Hunt.  Here, minority members of an LLC sued the other members and managers.  They alleged that these majority members committed fraud, breached their duty to disclose information, and converted their membership interests.

The trial court found that the claim was derivative.  This meant that the minority members of the LLC had no standing because the LLC itself was the proper party to bring this complaint.  However, the Supreme Court of Arkansas reversed, holding that the claim may proceed in the members’ names, stating that the members themselves were injured; and therefore, the claim was direct.  The court addressed the fraud, breach of duty to disclose, and conversion separately.

Regarding fraud, the court first noted these types of suits are normally derivative.  The  court noted that direct suits are appropriate, however, when the member shows an injury that is unique to the member, and not applicable only to the LLC.  In applying this rule to the present situation, the court found that the minority members suffered loss of their ownership.  The court further noted that the fraud being alleged by plaintiffs was not fraud that harmed only the LLC.  This resulted in the claim of fraud to be classified as direct, not derivative.

When analyzing the duty to disclose, the Arkansas Supreme Court noted their LLC statute.  This requires the LLC managing members to make available full and true information that reasonably affects any member.  The court later stated that these statutory rights of members supported individual claims, not claims made by the LLC.  This led the court to rule that this claim was also direct.

Finally, the court addressed the claim of conversion (wrongful possession of another person’s property).  In this case, the plaintiffs contended that the LLC converted the minority member’s interests.  In their complaint, the plaintiffs stated the the managing members did this through fraudulent misrepresentation.  The court agreed that the conversion was tied to the fraud; since the fraud claim was direct, then the conversion claim was also direct.

Throughout the opinion, the Arkansas Supreme Court constantly compared LLC and corporate law.  The court even mentioned corporate case law and applied it to the LLC case at hand. This was a surprise to many, and appeared to blur the line between the two business entities.  By ruling that these types of claims were direct, the Arkansas Supreme Court made it easier for a disgruntled LLC member to bring a suit against the other members.  If this type of ruling becomes a trend for other states, it means that the LLC may have to take more steps to protect themselves from liability.

 

 

By | 2016-12-13T21:20:15+00:00 April 18th, 2014|Categories: Lawsuits, LLCs & Corporations, Member Disputes|0 Comments

Olmstead vs. Federal Trade Commission

This Florida Supreme Court case involved the attempt by the Federal Trade Commission to enforce collection of a $10 million judgment it got against Shaun Olmstead and Julie Connell for their involvement with entities that operated an advance-fee credit card scam. The issue before the court was:

“Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all, ‘right, title, and interest’ in the debtor‘s single-member limited liability company to satisfy an outstanding judgment.”

Olmstead argued that the issue should be answered in the negative because the only remedy available to a creditor who has a judgment against a member of a Florida single-member LLC is a charging order.  The court said:

“we rephrase the certified question as follows: ―Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member limited liability company to satisfy an outstanding judgment. We answer the rephrased question in the affirmative.”

The reason the court allowed the creditor to get to the assets of the single member Florida LLCs is because the court ruled:

“that there is no reasonable basis for inferring that the provision authorizing the use of charging orders under section 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor‘s interest in single-member LLC.

California LLC law is different from Florida’s LLC law.  California’s LLC member charging order protection is contained in California Corporations Code Section 17705.03, which states:

On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.

See “Olmstead Decision Does Not Make All Single Member LLCs Useless.”

By | 2016-12-13T21:20:23+00:00 June 24th, 2010|Categories: Asset Protection, Charging Orders, Lawsuits|0 Comments